Last week Representative Thaddeus McCotter of Livonia spoke passionately about the real needs for preventing the collapse of the auto industry but we still failed to pass anything to help the auto industry. Now, if you read back through this blog you’ll know that I don’t have any particular love for cars or the automotive industry. What I do care about is the economy in particular the US economy. I like when it’s stable and not in crisis mode where fear runs through the streets and business activity stops. I don’t like when every day we hear that the economy has yet again experienced something unprecedented or which last occurred during the Great Depression.

These are interesting times.

After all that’s recently happened to our economy I fear what could happen if it were to experience another devastating economic shock. That’s what the sudden collapse of the domestic auto industry would be. The Big 3 directly employ a quarter of a million people and up to 2 million indirectly. But I’ve read estimates that if only one of the Big 3 were to go into bankruptcy 2.5 million jobs would be lost next year. Our economy has already been bleeding millions of jobs causing a downward spiral effect that has not stopped.

“If GM were to discontinue operations, the cost to local, state, and federal governments could reach $156.4 billion over three years in lost taxes, and unemployment and health care assistance.”

Automakers are different from other companies that might go in to bankruptcy. If I buy a television from a company that goes bankrupt I might lose the warranty but most likely the television wasn’t going to have any problems anyways and if it did I was probably planning on replacing it soon and either way it’s not a huge amount of money. But when it comes to cars, no matter who breaks them expensive things inside them will break and a warranty is essential. Enough people would stop buying cars from that company because of warranty fears that the company would spiral down until those fears became reality. So that’s how bankruptcy, which is supposed to protect a company, would actually do the opposite in the case of car companies.

These are interesting times. Perhaps in another down cycle of the auto industry the rest of the economy might have been stable enough to withstand the loss of millions of auto related jobs. But what we’ve seen is a collapse of the global financial system, the free market showing that it can only exist with outside help. Free marketeers would have said that no governments anywhere in the world should have done anything after the economic destruction of October 2008 but clearly doing nothing was not a choice. It’s not clear that the things that governments did do were the right things but we saw how markets reacted when we tested the idea of doing nothing.

The main argument that people bring up for not helping the auto industry is that in a purely free market governments should not stick their fingers in any company due to the moral hazard of not allowing certain companies to be punished. The conditions we are seeing now are not normal nor is the credit freeze any fault of the automakers. It’s true that automakers have been losing money recently and part of this is due to the restructuring that they have already been undergoing new regulations that have been imposed on the industry by the government. So the failure of the credit markets came at a particularly vulnerable time for the auto industry.

The thing is whether we choose to make the “morally correct” decision to stabilize the financial system or auto industry. What’s at stake is the entire economy. There is a point at which one single thing is too big to fail because sudden failure would cause such a shock to the market that the free market would not be able to cope. It’s like catching a cold many times over versus getting hit by a car. And actually right now our economy is so weak that even colds can be dangerous. The time to punish a child and teach them a lesson is not when they are sick in bed. Right now we need to be doing everything we can to stop the bleeding, stabilize the economy, keep it from falling into a long depression, and try to return to normalcy.

3 Comments

Thank you for your speech. Absolutely the best speech of all the participants in the hearing. If you ever visit Sarasota, Florida I would love you to attend my entrepreneur luncheon group called Young Entrepreneurs of Sarasota (YES). Our web site for our group is www.yes941.com John

On 12.14.08 Right wrote these pithy words:

“First of all, the money that would be used for loans to the automakers is money that has already been allocated. It’s not new tax money that we have to come up with.”

The difference is, what will GM do with our money? This money does not exist! If it’s taxpayer money, give me the chance to invest where I think it makes more sense. To throw it at the Big 3 would be to throw it out the window, $100,000 per second.

“If GM were to discontinue operations, the cost to local, state, and federal governments could reach $156.4 billion over three years in lost taxes, and unemployment and health care assistance.”

Newsflash: GM will discontinue opertations no matter how much we throw at them. We will need to adapt, cut government spending, and get used to living within our means. Might as well start now.

“The main argument that people bring up for not helping the auto industry is that in a purely free market governments should not stick their fingers in any company due to the moral hazard of not allowing certain companies to be punished.”

That’s NOT the main argument. The main argument is that the Big 3 have made poor decisions over the years and cannot effectively run a business. They are bloated, weighed down with debt, have unrealistic and uncompetitive UAW wages and pensions to contend with, and are too big to adjust to changes in the market. They’ve been living in a dream world and it’s time to wake up and smell the coffee. They need to be smaller and smarter, and/or 1 or 2 of them need to go away. They need a controlled bankruptcy to shed the shackles of organized labor.

But in general, the people of Detroit need to understand that just because a standard of living was enjoyed during the glory days, doesn’t mean it will last forever and doesn’t mean it’s a guarantee. The rest of us (and those like me who worked for the auto industry and left Detroit because we saw the writing on the wall) should not be forced to pay for this unrealistic standard of living while we struggle to get by.

Bottom line Detroit: You are no longer the center of the universe. You are not needed. We are willing to see the Big 3 go under and willing to suffer the effects of it. We have more confidence that things will work out better with you gone than if we give you more money to waste on cars we don’t want to buy.

On 12.14.08 Right wrote these pithy words:

“Start up a automakers like Tesla and AFS are also now begging the federal government for hundreds of millions of dollars before they’ve even produced anything.”

This is a very misleading and inaccurate statement. Tesla applied for $400 million of loans under the initial $25 billion loan guarantee program. They were not begging. They were taking advantage of low cost loan guarantees specifically to support the development of advanced vehicle technologies. Since they are in the business of producing only zero-emissions cars utilizing pure electric drivetrains they would have been stupid to not take advantage of this.